Refinancing: Will your credit score take a hit?

This is what refinancing a mortgage can do to your credit score

Refinancing: Will your credit score take a hit?

When interest rates started to drop in the spring of 2020, my husband and I took notice. We watched as the rates on both fixed-rate and adjustable-rate mortgages continued to slide to historic lows. As more friends gushed about how much they’d lowered their rates and monthly payments, we decided to look into refinancing.

A mortgage refinance is when you take out a new loan to replace your existing loan. The most common reason to do this — especially now with rock-bottom rates — is to lower your monthly payment.

Locking in a lower interest rate by refinancing can save some serious cash in your monthly budget. And those savings add up to a substantial sum over time. According to Freddie Mac, FMCC, borrowers who refinanced to lower their rate or extend the term of their loan saved an average of nearly $2,300 in annual interest during the first quarter of 2020.

But there could be an unintended downside to refinancing your mortgage: Your credit score might take a hit. The good news, though, is that the dip is temporary and your score should bounce back. Here’s what I noticed when I refinanced my mortgage.

A lower rate … and a lower credit score, temporarily

When we started shopping around for rates on a new mortgage — it’s best to get a few quotes so you know your options — we knew that the creditors would check our credit reports. We knew that this would show up as a “hard inquiry” on our reports, which would ly ding our credit scores by a few points.

We learned that even if a few different creditors pull your reports while you’re interest rate shopping, multiple inquiries while rate shopping over a short time frame will usually be lumped together into just one inquiry. That way, the effects on your score are minimized.

After locking in a low rate and signing a fat stack of papers, we were the proud owners of a brand-new mortgage. We traded our 30-year mortgage for a 15-year loan at a much lower interest rate, and successfully slashed the number of years we’ll be making payments. I was ecstatic about the money we’d save. But I wasn’t quite as excited about what happened to my credit score.

About a month after closing, I noticed that my FICO FICO, +2.80% score dropped more than 30 points. My VantageScore fell 13 points. These two main credit scoring models consider most of the same factors when calculating your credit score but weigh them a bit differently. The things that affect your scores are:

  • Payment history: Are you paying bills on time?
  • Credit utilization: How much of your credit limits are you using?
  • Balances: How much do you owe overall?
  • Age of credit: What’s the average age of all your accounts?
  • Kinds of credit: Do you have a mixture of revolving accounts, credit cards, and installment loans, where payments are equal and run for a set period?
  • Recent inquiries: How many hard pulls on your credit do you have?

I had a good history of on-time payments, an acceptable mix of credit and the recent inquiries on my report were minimal. Once the new loan showed up on my credit report, the biggest drag on my score was that the new loan’s balance was, of course, 100% of its origination amount.

Unfortunately, when you refinance, the information about how much of your previous loan you had paid off doesn’t carry over. You also ly will lower your overall age of accounts by replacing an older account with a brand-new one.

3 ways to minimize the effects on your credit

You can take steps to protect your credit during the refinance process:

  • View interest rate shopping as a sprint, not a marathon: When you shop around for the lowest rates, submit all of your applications within 14 to 45 days so they can be treated as a single credit inquiry. Newer FICO scoring models allow a 30- to 45-day period, but some older FICO scoring methods that are still in use limit the window to 14 days. VantageScore also uses a 14-day window.
  • Don’t plan another large purchase around the same time: If you’re planning on buying a new car or financing a large purchase on a credit card, time your purchases around your mortgage refinance. Buying a car or opening a new credit card will result in more hard pulls on your report, which will further drop your credit score. Big balances on your credit card could increase your credit utilization ratio and cause your score to take a hit.
  • Make sure you know when your first new mortgage payment is due: Refinancing your mortgage can be a lengthy and detailed process. Sometimes your new loan can be sold to a different lender before you even make your first payment. Be clear on when your payment is due and whom to send it to. Missed or late payments can greatly affect your credit score.

The good outweighs the bad

For me, and for many people, refinancing to a lower interest rate mortgage is the right move. The money saved over time by reducing the monthly payment or slashing the length of the loan will far outweigh any credit score damage. The credit score dip is temporary, and the numbers should continue to bounce back the more the new loan is paid down.

Stacie Charles has refinanced her Texas home more than once in the 12 years she’s lived in it and experienced a dip in her credit score each time, by as much as 40 points: “My scores dropped as soon as the new mortgage showed up on my credit report.” But she saw her credit scores creep back up several months after the refinances, and they were fully restored after four to six months.

Before refinancing, do the math to make sure it makes sense for you. But don’t let the fear of a temporarily decreased credit score stop you from locking in lower interest rates. Minimize the negative effects as best you can, and know that as long as you continue to manage your credit wisely, your scores will recover.

More From NerdWallet

Erin Hurd is a writer at NerdWallet. Email: ehurd@nerdwallet.com.

Источник: https://www.marketwatch.com/story/this-is-what-refinancing-a-mortgage-can-do-to-your-credit-score-11610741138

Does Refinancing Hurt Your Credit Score?

Refinancing: Will your credit score take a hit?

Mortgage Q&A: “Does refinancing hurt your credit score?”

Consumers seem to be obsessed with their credit scores and what impact certain actions may have on them.

Perhaps the credit bureaus and credit score distributors are to blame, as they’re constantly urging us to check our scores for any changes.

Let’s cut right to the chase. When it comes to mortgage refinancing, your credit score probably won’t be negatively impacted unless you’re a serial refinancer. anything else, moderation is key here.

When you refinance your home loan, the bank or mortgage lender will pull your credit report and you’ll be hit with a hard credit inquiry as a result.

It’ll stay on your credit report for two years, but only affect your scores for the first 12 months.

The credit inquiry alone won’t necessarily lower your credit score, but if you’re constantly refinancing and/or applying for other types of new credit, the inquiries could add up to a point where they’re deemed unhealthy.

The credit score scientists found out long ago that individuals who apply for a ton of new credit are often more ly to default on their obligations.

But that doesn’t mean you can’t apply for mortgages and other types of credit if and when you feel it’s necessary.

You Could See a Credit Score Ding When Refinancing Your Mortgage

  • All 3 of your credit scores may fall temporarily
  • As a result of a mortgage refinance application
  • But the impact is usually quite minimal, say only 5-10 points
  • And fleeting, with score reversals happening in a month or so

Because a mortgage refinance is a new credit application, your credit score(s) could see a bit of a ding, though it probably won’t be anything substantial unless you’ve been applying anywhere and everywhere for new credit.

By a “ding,” I mean a drop of 5-10 points or so. Of course, it’s impossible to say how much your credit score will drop, or if it will at all, because each credit profile is completely unique.

Simply put, those with deeper credit histories will be less affected by any credit harm related to the mortgage refinance inquiry, while those with limited credit history may be see a bigger impact.

Think of throwing a rock in an ocean vs. a pond, respectively. The ripples will be a lot bigger in the pond.

But in either case, the ripple shouldn’t be much of a ripple at all, and nowhere close to say a late payment because it’s not a negative event in and of itself.

[What credit score is needed to buy a house?]

You Get a Special Shopping Period for Mortgages

  • FICO ignores mortgage-related inquiries made in the 30 days prior to scoring
  • And treats similar inquiries made in a short period (14-45 day window) as a single hard inquiry
  • Instead of counting multiple inquiries against you for the same loan
  • This may help you avoid any negative credit impact related to your mortgage search

First off, note that when it comes to FICO scores, mortgage-related inquiries less than 30 days old won’t count against you.

And for mortgage inquiries older than 30 days, they may be treated as a single inquiry if multiple ones take place in a small window.

For example, shopping for a refinance in a short period of time (say a month) may result in a large number of credit pulls from different lenders.

But they will only count as one credit hit because the credit bureaus know the routine when it comes to shopping for a mortgage.

And they actually want to promote shopping around, as opposed to scaring borrowers it.

After all, if you’re only looking to apply for one home loan, it shouldn’t count against you multiple times, even if you inquire with multiple lenders.

This differs from shopping for multiple, different credit cards in a short period of time, which could hurt your credit score more because you’re applying for different products with different card issuers.

Even if you shop for a mortgage refinance with different lenders, if it’s for the same single purpose, you shouldn’t be hit more than once.

However, note that this shopping period may be as short as 14 days for older versions of FICO and as long as 45 days for newer versions.

If you space out your refinance applications too much you could get dinged twice. Even so, it shouldn’t be too damaging, and certainly not enough to prevent you from shopping different lenders.

The potential savings from a lower mortgage rate should definitely trump any minor credit score impact, which as noted, is short-lived.

The mortgage, on the other hand, could stay with you for the next 30 years!

You Lose the Credit History Once the Account Is Closed

  • When you refinance it results in the closing of the old loan
  • That account will eventually fall off your credit report (in 10 years)
  • And closed accounts are less beneficial than active ones
  • But the new account should make up for the lost history on the old account

Another potential negative to refinancing is that you’d lose the credit history benefit of the old mortgage account, as it would be paid off via the new refinance.

So if your prior mortgage had been with you for say 10 years or more, that account would become inactive once you refinanced, which could cost you a few points in the credit department  as well.

Remember, older, more established tradelines are your credit score’s best asset, so wiping them all out by replacing them with new lines of credit could do you harm in the short-term.

Additionally, it could affect the average age of all your credit accounts (credit age), which is also seen as a negative.

But the savings associated with the refi should outweigh any potential credit score ding, and as long as you practice healthy credit habits, any negative effect should be minimal.

Cash Out Refinance Means More Debt, Possibly a Lower Credit Score

  • A cash out refinance could hurt even more
  • Because you’re taking on more debt as a result
  • And larger amounts of outstanding debt
  • Along with higher monthly payments can make you a riskier borrower

Also consider the impact of a refinance that results in a larger loan balance, such as a cash-out refinance.

For example, if your current loan balance is $350,000, and you take out an additional $50,000, you’ve now got $400,000 in outstanding debt.

The larger loan balance will increase your credit utilization, and it could result in a higher monthly payment, both of which could push your credit score lower.

In short, the more credit you’ve got outstanding, the greater risk you present to creditors, even if you never actually miss a monthly payment.

In summary, a refinance should have a compelling enough reason behind it to eclipse any credit score concerns, so focus on why you’re refinancing your mortgage first before worrying about your credit score.

Ultimately, I’d put it on the no-worry shelf because chances are the refinance won’t lower your credit score much, if at all. And score drops related to new credit typically reverse very quickly.

So even if your credit score fell 20 points, it would probably gain those points back within a few months as long as you made on-time payments on the new loan.

And most people are only concerned about their credit scores right before applying for a mortgage, so what happens shortly after your home loan funds may not matter much to you.

But to ensure you don’t get denied as a result of a credit score drop, it’s helpful to have a buffer, such as an 800 credit score in case your score does drop a bit while shopping around.

If you’re right on the cusp of a credit scoring threshold and your score dips slightly, you could wind up with a higher interest, or at worst, be denied a mortgage outright.

Read more: When to refinance a home mortgage.

Источник: https://www.thetruthaboutmortgage.com/does-refinancing-hurt-your-credit-score/

Does Refinancing Hurt Your Credit Score

Refinancing: Will your credit score take a hit?

July 15, 2019

If a high-interest loan is eating a hole in your wallet, you can often enjoy lower monthly payments and greater peace of mind by refinancing. However, you might be worried about its impact on your credit score.

Refinancing a loan can affect your credit score in several ways, but the effects are often short-lived compared to the financial benefits it can offer. Before you start the refinancing process, it’s essential to know what refinancing is, its benefits, and how exactly it can impact your credit score.

What is Refinancing?

Refinancing is the process of paying off your current loan with a new one. The new loan should have better terms and features, such as a lower interest rate. You won’t be free of your debt, but instead, your monthly payment to the new lender may be lower or you may have more of your payment go toward the loan principal, rather than interest.

Various loans have refinancing options available. Many people choose to refinance their student loans, auto loans, home mortgages, or personal loans.

Benefits of Refinancing a Loan

Refinancing may take some initial time and research, but it can pay off with several attractive benefits. People and businesses choose to refinance their loans for a wide variety of reasons.

  • To save money. Most people refinance their loans to save money on interest. If you can find a new loan with a lower interest rate than your current one, you can often enjoy significant lifetime savings – particularly on long-term loans.
  • To consolidate debt. If you’re paying a student loan, auto loan, home mortgage, and a credit card bill every month to different lenders, it can be difficult to make sure statements are paid in full and on time. Refinancing allows you to consolidate many of your bills into a single payment, which is especially helpful if the new loan has a lower interest rate.
  • To adjust the loan term. If you need to extend your loan repayment term and make lower monthly payments, you can shop for a loan that fits your needs. You can also choose to shorten the loan term to get rid of your debt more quickly.
  • To change the loan type. Refinancing can be a helpful tool if you’re unhappy with your current loan type. For example, you might find that a fixed-rate mortgage offers more protection than one with a variable rate if rates are currently low.

How Does Refinancing Affect Your Credit Score?

While refinancing can impact your credit score, most of its effects are short term. Here are the two main ways your credit might be affected throughout the refinancing process.

1.Refinancing Results in Hard Credit Inquiries

Each time you apply for a loan – including a refinancing loan – potential lenders may pull your credit, which may result in a hard inquiry on your credit report. Hard inquiries can lower your score by a few points, and multiple hard inquiries can have a more prominent effect.

If you want to shop around for the best rates for refinancing your current mortgage, you should submit all of your applications within 30 to 45 days, according to FICO®.

During this period, certain kinds of loan inquiries are treated as a single inquiry that won’t put a significant strain on your score.

However, some lenders still use older FICO models with only a 14-day span, so it’s best to keep your inquiries within this stricter timeframe.

But if you’ve already made multiple inquiries without following the guideline above, know that a hard inquiry’s influence on your score diminishes over time, so its effects should be short-lived.

Generally, a hard inquiry will show on your credit report for two years, but will only impact your credit score for one year.

You can monitor your credit to view the impact of past inquiries on your score.

2. Replacing Old Debt Reduces the Opportunity to Build Long-standing Credit

Did you know that the age of your loan factors into your credit score? Older, established loans that are in good standing are valuable in boosting your credit.

When you refinance a loan, your old loan is technically paid off by the new one. When you pay off your old loan, you replace a long-standing payment history with a new one.

Even though the debt is the same, the new loan can make your credit score take a sudden hit.

However, if you stand to save a lot of money in refinancing, such as getting a lower rate on a mortgage, the hit can be worth it. 

When Should You Avoid Refinancing? 

Refinancing can provide many advantages, but there are some instances where it may be better to hold off. For example, with a mortgage, perhaps you have a fixed-rate mortgage with a higher interest rate.

To lower your interest rate, you might refinance and secure an adjustable-rate mortgage (ARM) with a lower interest rate right now.

ARMs, however, may not retain that lower rate, so you may only reap the benefits temporarily. 

You must also consider the fees associated with a refinance. Sometimes, those expenses cost more than the money you’d save. Also, if you’ve already paid off a large majority of your current loan, a refinance may not be cost effective.  

Refinance Your Loan with PSECU

If you’re interested in refinancing a loan, you might have a few questions about the process. We’re here to help you explore your options.

We offer mortgage refinancing options and credit card balance transfers that allow you to enjoy low interest rates. Apply now to start saving on your loans, or contact us for more information about the best options for your situation.

FICO® is a registered trademark of Fair Isaac Corporation in the United States and other countries.

Источник: https://www.psecu.com/learn/financial-tips-for-every-stage-in-life/2019/07/15/does-refinancing-hurt-your-credit-score

Does Refinancing A Mortgage Hurt Your Credit?

Refinancing: Will your credit score take a hit?

If you’ve been keeping an eye on falling mortgage refinance rates, you might be considering what impact refinancing can have on your wallet and credit. Typically, refinancing your mortgage does affect your credit score, at least temporarily. Here’s how.

How refinancing a mortgage affects your credit

Even though there are many long-term benefits of refinancing your mortgage, there are a few ways the refinancing process can make a shorter-term dent in your credit score.

“Any application for a loan or credit will have an impact on your credit,” explains Melinda Opperman, president and chief relationship officer of the nonprofit Credit.org. “How strong that impact is will vary a lot depending on many factors.”

The ways a mortgage refinance can impact your credit score include:

Credit inquiries

Whenever a mortgage lender conducts a hard credit check to see if you qualify for a refinance, that inquiry is recorded on your credit report. Credit inquiries affect your FICO credit score for just one year and remain visible on your credit report for two.

“For most people, one additional inquiry will take less than five points off their FICO scores,” Opperman says. “However, as you get multiple inquiries, it starts to add up, as inquiries account for 10 percent of your total FICO score.”

New loan vs. old loan

The length of your credit history accounts for 15 percent of your FICO score and includes how long your mortgage has been open. When you refinance your mortgage, you’re closing the existing mortgage in exchange for a new one, “so you effectively shorten the age of your average credit account,” Opperman says.

Juggling multiple new loans

Applying for several different types of loans can drive down your credit score faster than if you were focusing solely on doing a mortgage refinance, notes David Battany, executive vice president of Capital Markets for Guild Mortgage.

“If the borrower is shopping for all sorts of debt — mortgage, car loan, credit card — then that pull would become a negative on their FICO score,” Battany says.

Late or missed payments

When you’re in the process of refinancing and replacing one mortgage with another, it can be hard to keep track of how much longer you need to keep making payments on your old mortgage and when to start making payments on the new one. That confusion can result in delinquent payments, which usually affect your credit score. Regular communication with your lender can help you stay on top of when your payments are due.

If you’re considering doing a cash-out refinance, in which you’ll replace your old mortgage with a new larger one, you could be adding to your debt load, Battany cautions.

“In that scenario, you have a greater possibility that it can hurt your FICO score,” Battany says. However, if you’re doing a cash-out refi in order to pay down revolving, unsecured debt, a credit card balance, that’d ultimately have a positive effect on your score, Battany notes.

What if I refinance more than once?

The number of times you refinance your mortgage shouldn’t do any compounding damage to your credit if you space the refis out. Waiting at least one year before you refinance again will make it so that the new round of credit inquiries won’t accumulate with the first time you refinanced, Opperman says.

Rather than a credit hit, where homeowners typically lose when doing multiple refinances in a short time frame is the money spent on closing costs and other fees.

“Ultimately, the main reason not to refinance too often isn’t your credit score; it’s simply how expensive refinancing is, and how long it takes to recoup the savings you might get on your mortgage payment,” Opperman says.

It’s worth noting that if your credit score was in good shape when you got your mortgage or after your last refinance, and it’s remained that way, you should be able to get a good rate this time around.

What you can do to cushion the impact on your score

Although the impact of a mortgage refinance on your credit score is usually temporary, there are ways you can help soften the blow.

“There are scenarios where any negative impact can be quickly overcome, which can make refinancing a mortgage a good idea from a credit standpoint,” Opperman says.

  • Give yourself 45 days – Under the new FICO credit model, any hard credit inquiries made within 45 days are bundled and treated as one inquiry for scoring purposes. So even if you’re getting quotes from multiple lenders, your credit will only take one hit as long as you limit your comparison-shopping to a 45-day window.
  • Do a “soft” inquiry – Check your credit score yourself at AnnualCreditReport.com well in advance of refinancing, Opperman recommends, rather than having a lender run a hard inquiry. “Once you know your score, you can work to improve it,” Opperman says.
  • Get an initial quote from lenders – Ask lenders to give you a preliminary quote your credit score without actually pulling your credit. “Once you’ve narrowed the field down a bit, you can let the last few lenders do a full credit check and formally offer you a new loan,” Opperman says.
  • Leave your credit alone – Aside from paying off outstanding balances, avoid making any big changes where your credit is concerned during the refinancing process. “Don’t buy a new car, or get a new credit card, or do anything that could impact your credit score while working toward your new mortgage,” Opperman says. If you do pay off a card, hold off on closing the account, as that could shorten the length of your credit history and hurt your score.

Next steps

Once you’ve made a plan for how to protect your credit during the refinancing process, there are a few steps you can take to help land the best refinance rate and terms.

1. Carefully consider “no-cost” or “zero-cost” refinance offers

A no-closing-cost refinance can be helpful if you don’t have the cash to pay for closing costs upfront, but it’s usually in exchange for a higher interest rate or for the costs to be financed with the new loan. Both could mean you end up paying more in the long run.

2. Request a range of rates

When you ask a lender for a quote, Battany recommends also asking the lender to quote a rate that’s slightly higher than the one they come back with, and one that’s slightly lower.

“There are times when a slightly higher rate can be much better in fees and price, or you can get a better rate with only a slight increase in fees,” Battany says.

3. Explore government loan refis

Even if your credit is already in rough shape, options FHA loans and VA loans can make it possible for you to still take advantage of low refinance rates.

4. Use APR to compare offers

The annual percentage rate (APR) on a refinance offer reflects the true cost of the loan and can provide a more accurate basis for comparing offers.

“Mortgage APR includes interest rate, points and fees charged by the lender, so comparing APRs truly lets you find the best-value mortgage offer for you,” Opperman says.

5. Consider your reasons for refinancing

Ask yourself what your goals are for refinancing your mortgage.

“Really sit down and think about why you want to refinance your mortgage and what you hope to accomplish,” Opperman says. “If you’re just looking to lower your interest rate, you’re probably making the right move, as long as the new loan isn’t too expensive upfront.”

Under the right circumstances, the long-term gains of refinancing would outweigh any short-term blemishes to your credit.

Learn more:

Источник: https://www.bankrate.com/mortgages/does-refinancing-hurt-your-credit/

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